If so, and you live in Ireland. they may need to obtain a second opinion around their Estate Planning arrangements, if they are looking to make use of exemptions that apply when passing assets between generations.
Jim is a UK National with 3 minor children living in Ireland for the last 4 years and his Mother, Grace a widow, lives in the UK.
She has bank savings of approx. £2m which earns her around £1000pa tax free as she is a basic-rate taxpayer. The family home is worth around £175,000.
The family home is therefore exempt from inheritance tax and the rest of the estate is subject to UK Inheritance Tax at a rate of 40% on everything over £325.000 (tax year 2020/2021)
Grace’s Lawyer in the UK has not suggested any planning for Grace’s estate in case she needs the money. Her will leaves her estate to a discretionary trust for the benefit of Jim and the grandchildren.
Jim asked us for a second opinion.
Our advice: Quickly make a gift to Jim
Although Jim is Irish Resident, he is non-domiciled and since he has only been living in Ireland for 4 years, he is not subject to Irish Capital Acquisitions Tax. Grace could give Jim €2m this year free from Irish tax and provided she lives for 7 years from the date of the gift, no UK Inheritance Tax would be payable saving up to £670,000 in UK Inheritance Tax at current rates.
Jim could invest this money in a remittance portfolio and provided he doesn’t bring the income or gains into Ireland they will be free from Irish Tax. The current dividend yield is running at around 2% or roughly £40,000pa (forty times the bank interest Grace is currently making)
Jim can pass any of this “income” to Grace without tax as in her hands it will be seen to be a gift of Jim’s capital.
All of the capital growth would now accrue to Jim’s estate saving 40 pence in the pound from additional Inheritance Tax on any capital gains. Furthermore, provided Jim does not remit the gains to Ireland, these are also free from Irish Tax at a rate of 33%. Jim can bring in any of the original £2m gift free from Irish tax as this is considered capital and not income or gains.
Jim passes this information on to Grace to discuss with her Lawyer. He takes his time to respond and now Jim has been living in Ireland for 5 consecutive tax years.
“How much can Grace give to Jim free from Tax?” asks the Lawyer
It’s too late now
Now that Jim has been living in Ireland for 5 years, he is subject to Irish Capital Acquisitions tax. The most that Grace can give to Jim free from Irish Tax is now just €335,000 (tax year 2020).
If Grace now gives him €2m, Jim will be liable to Irish Tax of €549,450. If she leaves it in her Estate at the time of her death the UK Inheritance Tax could be as much as £670.000 at current rates.
To make matters worse, the Discretionary Trust in Grace’s Will could result in a double tax charge when money passes onto Jim or the Grandchildren due to a difference in the timing of the payment of UK Inheritance Tax and Irish Capital Acquisitions Tax.
The UK Estate will be subject to UK IHT at 40% and payments to the beneficiaries subject to Irish CAT with a further tax charge of 33%.
The UK/Ireland double-tax treaty doesn’t provide any relief as these would be different taxes payable at different dates.
We need to re-write Grace’s Will
We have a solution which would be able to ensure that the maximum tax-free inheritance passes to both Jim and the minor grandchildren claiming all of the available exemptions in Ireland and ensuring that the credit for UK Inheritance Tax is available against Irish CAT.
We have obtained a written opinion from leading Estate Planning Lawyers in both the UK and Ireland as to the efficacy of this planning for the residuary estate within a UK Will for Irish CAT purposes.
Through our network of Estate Planning experts in the UK we can introduce your family to specialists who understand the interaction between the UK and Irish Law and can draw up appropriate documentation to address these issues.
When it has been left too late
We have successfully argued and won a submission to Irish Revenue for UK Law to be applied to a post-death Deed of Variation effected to a UK Will by an Irish Resident beneficiary. This was carried in the International STEP magazine as a case study in cross-border planning between Ireland and the UK.
As in all things relating to cross-border tax matters, this is not black and white and, in many Estates, the simple approach is often the best.
Much is down to interpretation and there are no guarantees that a successfully won argument will be repeated in the future if Revenue on both sides of the Irish sea were to take a different view.
For further information, please see here